Bitcoin exchange Mt. Gox shuts down amid rumors of $300 million hack

On Monday evening, troubled Bitcoin exchange MtGox halted all trading activity. The site has now gone completely offline.

The Tokyo-based Bitcoin exchange, which spent much of the previous year as the most prominent Bitcoin financial institution in the world, stopped processing withdrawals earlier this month after an issue with its implementation of the Bitcoin protocol, dubbed ‟transaction malleability,” reportedly interfered with its ability to authenticate transactions.

As a result, the price of bitcoins on MtGox has plummeted. Over the past 24 hours, the value of a Bitcoin on MtGox has dropped by 40 percent. Bitstamp, the new industry leader that has taken over much of MtGox’s market share in recent weeks, is posting Bitcoin prices nearly $100 higher than what's listed on MtGox. This price discrepancy represents a high level of uncertainty among cryptocurrency traders that the bitcoins held by MtGox will never be recovered.

An internal MtGox document, titled ‟Crisis Strategy Draft,” leaked Monday afternoon, said the exchange was the victim of a multi-year hack that took advantage of the transaction malleability issue to funnel some $300-plus million worth of Bitcoin from the site, which is now reportedly teetering on the verge of insolvency:

At this point 744,408 BTC are missing due to malleability-related theft which went unnoticed for several years.

The cold storage has been wiped out due to a leak in the hot wallet. The reality is that MtGox can go bankrupt at any moment, and certainly deserves to as a company. However, with Bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5~10 years, and cause governments to react swiftly and harshly. At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public.

The document lays out a four-part strategy for the site to move forward in light of the losses. The plan recommends taking steps through partners to reduce the site's liabilities, temporarily shutting down the site, rebranding it as simply ‟Gox”, and making a very public change in management. The document suggests the timing of the actions should occur Feb. 25—the day after the the site shut down.

Wired reports it was unable to verify the authenticity of the document. A reporter from the venerable tech magazine reports he spoke briefly to a MtGox representative, who referred him to the exchange’s website. The website went offline a few hours later.

To give a sense of the size of the alleged theft, Bitcoin’s total market cap is only $6.9 billion. Business Insider notes that, if the scale of the theft is accurate, it represents 6 percent of all the bitcoins currently in existence.

A joint statement released by by the heads of the six major Bitcoin business—Coinbase, Kraken, Bitstamp, BTC China, Blockchain.info, and Circle—slammed MtGox’s leadership and urged users of the currency not to lose hope:

"This tragic violation of the trust of users of Mt.Gox was the result of one company’s abhorrent actions and does not reflect the resilience or value of bitcoin and the digital currency industry. There are hundreds of trustworthy and responsible companies involved in bitcoin. These companies will continue to build the future of money by making bitcoin more secure and easy to use for consumers and merchants. As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today. ...

"In order to re-establish the trust squandered by the failings of Mt. Gox, responsible bitcoin exchanges are working together and are committed to the future of bitcoin and the security of all customer funds. As part of the effort to re-assure customers, the following exchanges will be coordinating efforts over the coming days to publicly reassure customers and the general public that all funds continue to be held in a safe and secure manner: Coinbase, Kraken, BitStamp, Circle, and BTC China."

Unlike traditional financial institutions, with are typically insured by their home governments or private insurers, users who parked their money at MtGox likely have no recourse to reclaim their lost money from the site outside of filing a lawsuit against the site’s operators.

The inability of users of the exchange to get their money out of MtGox has led to widespread backlash against the site and its CEO Mark Karpeles. A Change.org petition has surfanced, calling for the removal of Karpeles from his seat on the board of directors of the Bitcoin Foundation, a nonprofit Bitcoin advocacy organization that served as the most high-profile face of cryptocurrency in the United States.

Earlier on Monday, Karapeles bowed to pressure and resigned from the board, and the site deleted its Twitter account.

While many across the Bitcoin realm are understandably cursing MtGox, others are viewing what they see as the final collapse of MtGox as a net positive for the cryptocurrency community, as this thread on Reddit’s r/Bitcoin forum demostrates. After all, as with most Bitcoin events, it's always one step back before there's another one forward.

Update: As of Tuesday morning, MtGox's website now relays the following message:

Dear MtGox Customers,

In the event of recent news reports and the potential repercussions on MtGox's operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.